Money-(news round-up)-May 20.
qxd 5/3/2007 12:27 PM Page 3
bt money
Go Floating?
As the interest rates rise, floating rate deposits and funds could just be what you need.
NITYA VARADARAJAN
OU’VE HEARD OF FLOATING RATE
Y home loans, but here comes the
floating rate fixed deposits. Banks
have begun to offer floating rate
fixed deposits to investors where
the interest payment increases as
the rates in the economy increase.
Among the first to launch a floating
rate scheme is the Punjab National
Bank. Over the last seven months,
interest rates on bank deposits have
increased from around 7 per cent to
around 10 per cent—the last time
banks offered such exciting rates
was nearly a decade ago.
Of late, investors were scram-
bling to break old fixed deposits at
lower yields and redeploying them in
fresh ones at higher rates of interest,
as rates at the short-term are higher
and many banks are offering excel-
lent short-term returns. But you need
not go through the hassle of breaking
your fixed deposit every time the
rate increases—instead take a look at
the floating rate fixed deposit.
When interest rates dip, both
floating rate deposits and funds will
lose money for the investor as yields
take a beating. The rates on such
deposits will periodically get
adjusted according to the rates in the
economy so floating rate deposits
work best in a rising interest rate
scenario, and is hardly the place to
get stuck in when the rates start to
slide. As of now, there are no signs
of interest rates cooling off, but as
inflation starts to tame, the rates
are expected to taper off.
Floating Smart
Another similar product that’s just
appropriate for investment now is
the floating rate mutual fund.
Uttam Agarwal/ Vice President (Mutual Funds)/ Bajaj Capital
“If the investor favours debt over equity, a floating rate
mutual fund is an attractive option”
000 BUSINESS TODAY MAY 20 2007
For a Change, Just Float
● Floating rate fixed deposits yield higher when the interest rates are rising
● Interest rates are reset periodically every three to six months
● Floaters save time in redeploying funds every time the rates go up
● If the interest rate falls, floaters’ yield tumbles so go for them only during
rate increases
● Floating rate funds are more tax efficient than bank floating rate FDs
● Switch to fixed rates immediately if the interest rates have peaked out
Floating rate funds invest in bonds 20 per cent after indexing to infla-
and securities that are floating in tion. If you pay just 10 per cent
nature and returns are benchmarked tax, the outgo works out to Rs 1,
against a particular index such as thus fetching you a net return of
MIBOR. The coupon rates could be Rs 9. Whereas if you opted for the
reset every three to six months. 20 per cent long-term capital gains
Says Uttam Agarwal, a certified tax, and adjusting for the inflation,
financial planner and Vice President the asset price can get inflated by 6
(Mutual Funds), Bajaj Capital: “If per cent (the current inflation) to
the investor favours debt over eq- about Rs 106. Reducing the gain
uity, a floating rate mutual fund is (Rs 110) from the inflation-adjusted
an attractive option. In the last one price (Rs 106), the net gain works
year, these averaged 7 per cent, out to just Rs 4. The 20 per cent tax
though in the last one week return on this is merely 80 paise. Hence,
has been 9 per cent.” the post-tax return works out to
If a person opts for a term of less Rs 9.20. Which is why, a floating
than one year for a floating rate rate fixed deposit
mutual fund, the dividend option may not offer the
works fine—where a dividend tax of bang for the buck,
12.5 per cent is charged (there is while a floating
also a surcharge). If the tenure is rate mutual fund RAJKUMAR
longer, the growth option is attractive. could work
Comparing post-tax returns, smarter for you.
for instance, if the bank deposit
offers an interest rate of 10 per
cent, a deposit of Rs 100 grows
to Rs 110. If you adjust this for the
highest tax-bracked, net returns
are just Rs 7.
On the other hand, in a floating
rate mutual fund growth option
above a year, the tax would be ei-
ther 10 per cent of the actual gain or